Farm-Level Effects of Emissions Tax and Adjustable Drainage on Peatlands

Drained agricultural peatlands emit significantly higher amounts of greenhouse gas (GHG) emissions per hectare than mineral soils. GHG abatement costs for representative cereals (CF) and dairy (DF) farms in southwestern Finland were estimated by integrating an emission-based tax together with an option to invest in a subsidized adjustable drainage system on peat soils in a farm-level dynamic optimization model. With an average 10% share of peat soils from overall farm area, emissions tax rates over 15 (CF) and 19 (DF) €/tCO2e triggered adjustable drainage investments with a significant reduction in GHG emissions per ha, when assuming no crop-yield effect from the adjustable drainage. Abatement costs for emissions tax rates €12–50/tCO2e/ha were €16–44/tCO2e (CF) and €26–51/tCO2e (DF) for whole farm-soil emissions, depending on the share of peatlands on the farm, on the yield effects of adjustable drainage, and on crop prices. High emissions tax rates imply higher abatement costs since farms have a limited capability to adjust their production and land use. Thus, emissions reductions from peatlands can be achieved at reasonable costs when investing in adjustable drainage on peatlands. The income losses due to emissions tax, however, are high, but they can be compensated for farmers by lumpsum payments independent of their production decisions. Since existing agricultural policies such as the EU CAP system may have limited effectiveness on GHG emissions, the emissions tax and adjustable drainage on peatlands could promote GHG abatement significantly on farms and areas with abundant peatlands.

Designing the Optimal International Climate Agreement with Variability in Commitments

We analyze the design of an international climate agreement. In particular, we consider two goals of such an agreement: overcoming free-rider problems and adjusting for differences in mitigation costs between countries. Previous work suggests that it is difficult to achieve both of these goals at once under asymmetric information because countries free ride by exaggerating their abatement costs. We argue that independent information collection (investigations) by an international organization can alleviate this problem. In fact, though the best implementable climate agreement without investigations fails to adjust for individual differences even with significant enforcement power, a mechanism with investigations allows adjustment and can enable implementation of the socially optimal agreement. Furthermore, when the organization has significant enforcement power, the optimal agreement is achievable even with minimal investigative resources (and vice versa). The results suggest that discussions about institutions for climate cooperation should focus on information collection as well as enforcement.